The Illusion of Fairness: Part 1

As promised here is the follow-up on the “Incentives for the Payment of Taxes in Advance of the Tax Transformation Project Act.”  In this installment, I’d like to breakdown the provisions which allow for citizens to prepay taxes.

First of all, it should be crystal clear to everyone, that tax reform is coming to Puerto Rico.  There is no question whether the IVA will pass or not, it is only a matter of time.  How else can you explain the Puerto Rican government creating a process for citizens to prepay taxes?  I mean let’s get real here, it’s in the title of the new law.

Our old friend Occam’s Razor almost guarantees us that the only way to explain the creation of this new law is because it is a forgone conclusion that tax reform is coming.  I would go further to suggest that this law represents an unspoken covenant between the richest citizens of Puerto Rico and the Puerto Rican government.

Still not convinced?  Let’s just imagine that the tax reformation does not happen.  If that’s the case, then the Department of Hacienda has quite a mess on their hands.  They will have received payments for taxes, based on future tax rates that did not become law.  I guess they could simply refund the payments, that is, unless they really needed the cash (which they do).  What happens if the government spends some of the money?  Where will they get the money to make the refunds?

As I mentioned in the previous post, this program is aimed at a very selective group.  Here is a summary of the types of taxes eligible (PDF) and who would be likely to benefit from the discounted taxes.

Type of tax	Beneficiaries
Annuities	Owners of life or endowment insurance annuities
Capital Gains	Individuals, estates, trusts
Capital Gains	Corporations
IRA's and Educational IRA's	Individuals with IRA or IRA educational accounts
Dividend Distributions	Share holders of public corporations issuing dividends
Implicit Distributions	Corporations with accumulated earnings and profits

Secondly, as you can see, these discounted tax payments are aimed at any citizen with annuities, IRAs, and stocks.  In other words, these discounted taxes will benefit the richest of our citizens.

In addition, it is also aimed at companies large enough to have long term capital assets and those fortunate enough to have large profits.

I'm always suspicious of laws that claim to be doing one thing, but actually authorize something completely different. In this instance, the press release from the Department of Hacienda claims the governor signed into a law a tax amnesty program.  However, if you read the release or review the law (Ley de Incentivos para el Pago de Contribuciones en antelación a la Transformación Contributiva), you will realize that it also sets up a new program for the most wealthy Puerto Ricans to prepay taxes at discounted rates.